Signing a Settlement Agreement in Scotland: What You Give Up and What It Is Worth

Being handed a settlement agreement is unsettling, even when the terms look generous. The document is long, the language is unfamiliar, and there is usually a deadline attached. Many people sign simply to bring the whole thing to a close.

That is understandable, but it is rarely the best approach. A settlement agreement is a negotiation, and the law builds in a safeguard specifically so that you do not sign in the dark. Below we set out what you are actually agreeing to, and where the room for movement usually lies.

A settlement agreement is a legally binding contract between you and your employer. In return for a payment, and often other benefits, you agree not to bring specified legal claims arising from your employment or its ending.

Employers reach for one in a fairly predictable set of situations:

• Redundancy, whether an individual exit or part of a wider restructure
• Performance or capability concerns that both sides would rather not formalise
• Long-term sickness absence where a return looks unlikely
• A live grievance or disciplinary process
• A breakdown in the working relationship with a manager or colleague
• A mutually agreed departure on sensible terms

Employment law is reserved to Westminster, so the statutory framework is the same throughout Great Britain. The forum is Scottish, however. Claims are heard by the Employment Tribunals (Scotland), and breach of contract claims north of the border run under their own Scottish order rather than the English equivalent.

Your employer may also raise settlement in what the law calls a protected conversation, even where no dispute yet exists. Those discussions cannot generally be used against either side in an ordinary unfair dismissal claim. The protection is narrower than people assume, though, because it does not extend to discrimination or whistleblowing claims, and it can be lost if either party behaves improperly.

Sheriff Stuart Reid found the mother in contempt of court. He described her disregard of the order as deliberate and prolonged, and her conduct as, in his words, “protracted, brazen and entrenched”. Because a financial penalty was considered insufficient, he ordered that she be imprisoned for seven days. You can read the full judgment on the Scottish Courts website.

Those conditions are:

• The agreement is in writing.
• It relates to the particular complaint or proceedings being settled.
• You have received advice from a relevant independent adviser on the terms and effect of the agreement, and in particular on how it affects your ability to bring a claim before an employment tribunal.
• That adviser holds insurance or professional indemnity cover.
• The adviser is identified by name in the agreement.
• The agreement states that the statutory conditions have been satisfied.

A relevant independent adviser means a qualified lawyer, a certified trade union official or a certified advice centre worker. Independent is the operative word, because someone acting for your employer cannot fill the role.

Miss any of those conditions and the waiver simply does not bind you. Your employer therefore needs you to be properly advised far more than you might realise, which is why the cost of that advice is almost always met by them. There is no legal duty on an employer to pay, but in practice a contribution is offered as a matter of course, and the figure is written into the agreement itself.

The headline figure gets the attention, yet the surrounding terms often matter just as much to what happens next in your career.

A typical agreement will deal with most of the following:

• Notice. Whether you work it, or receive a payment in lieu of it.
• Accrued holiday that you have not taken, plus any bonus or commission owing.
• A reference. The strongest arrangement is an agreed form of wording annexed to the agreement, so there is no argument later about what will be said.
• Announcements. What colleagues and clients will be told, and when.
• Confidentiality and non-disparagement. These should generally run both ways rather than binding only you.
• Restrictive covenants. Sometimes new ones are introduced, sometimes existing ones are relaxed. Either way, read them closely.
• Continuing benefits, such as private medical cover to a set date, and any outplacement support.
• A tax indemnity, under which you promise to meet any further tax that HMRC later determines is due.

The tax treatment surprises people, and it materially changes what lands in your account.

The first £30,000 of a genuine termination payment, meaning compensation for the loss of your employment, can usually be paid without income tax. Anything you were contractually entitled to is taxed as normal, however. That covers salary, notice pay, accrued holiday, bonus and commission, regardless of the fact that they are being paid through a settlement agreement.

Where notice is not worked, the post-employment notice pay rules apply. A proportion of the package equal to the unworked notice is treated as earnings and taxed accordingly, which reduces the amount able to benefit from the exemption. Statutory redundancy pay also counts towards the £30,000, and payments made in return for new restrictive covenants are fully taxable.

Above £30,000, income tax applies, along with employer National Insurance. A well-drafted agreement breaks the total down clearly into its parts, so you can see which element is being treated in which way. If it does not, that is worth querying before you sign.

In short, the claims listed in the agreement. Employers usually specify a long list, frequently including unfair dismissal, discrimination, unpaid wages, holiday pay and breach of contract. Once you sign, those routes are closed.

Certain things should be carved out, and their absence is a warning sign. Accrued pension rights are normally preserved. Personal injury claims that you did not know about at the date of signing are usually excluded. Your right to enforce the agreement itself, obviously, survives.

Some protections cannot be signed away at all. No agreement can stop you making a protected disclosure, which is the legal term for whistleblowing. Since April 2026, an allegation of sexual harassment counts as a protected disclosure in its own right.

The rules on confidentiality are tightening further. The Employment Rights Act 2025 will void clauses that prevent a worker speaking about harassment or discrimination, subject to a category of permitted agreements still being defined in regulations. That change is expected during 2027 and will not apply retrospectively. Our overview of the Employment Rights Act 2025 covers the wider programme of reform.

Timing is shifting too. From 1 October 2026, the deadline for bringing most tribunal claims doubles from three months to six, where the relevant act or dismissal falls on or after that date. Breach of contract claims in Scotland follow shortly afterwards. A longer window to think is welcome, but signing closes it regardless of how much time technically remains.

Almost everything, in principle. Whether it moves depends on the strength of your position and how you put your case.

The elements most often improved are the compensation figure, the reference wording, the contribution towards your legal fees, the scope and duration of any restrictive covenants, the treatment of notice, and the wording of the internal announcement. Outplacement support and the retention of benefits are frequently available for the asking.

A sensible approach starts with valuation rather than emotion. Work out, with your solicitor, what a tribunal claim might realistically be worth, then discount it for the risk of losing, the delay involved and the strain of pursuing it. That gives you a benchmark against which to judge the certainty on offer.

Then be specific. Two or three well-reasoned requests carry far more weight than a long list, and a business-like tone keeps the conversation productive. Bear in mind that your employer wants a clean, valid agreement, and that goal usually creates room to move. Guidance from ACAS on settlement agreements is a useful neutral reference point if you want to read around the subject.

Pomphreys has advised employees across Wishaw, Lanarkshire and the wider central belt since 1897, and settlement agreements are among the most common reasons people come to us.

We work to your deadline. In most cases we can review your agreement and meet with you, in person or remotely, within twenty-four to forty-eight hours. We go through the document clause by clause, explain what each part actually does, and tell you plainly whether the terms look fair for your circumstances.

Our advice is honest rather than reflexive. Sometimes we will tell you to sign, sometimes to push back, and sometimes to walk away. Where there is a case worth making, we will negotiate it for you, whether that concerns the money, the reference or the restrictions on what you do next.

In most cases our fees for this work are met in full by your employer. Our settlement agreement service sets out how the process runs. If the agreement has arisen from a dismissal you consider unjustified, or from a redundancy process, our pages on unfair dismissal and redundancy are worth reading alongside it, and our wider employment law team can advise on any related issue.

Partly. The first £30,000 of a genuine compensation payment for loss of employment can normally be paid free of income tax. Anything you were contractually due, including salary, notice pay, holiday pay and bonus, is taxed in the ordinary way. Where you do not work your notice, the post-employment notice pay rules treat a corresponding slice of the package as earnings. Statutory redundancy pay counts towards the £30,000, and payments for new restrictive covenants are fully taxable.

Not for the claims listed in the agreement, which is precisely what your employer is paying for. You keep the right to enforce the agreement itself, and standard carve-outs preserve accrued pension rights and personal injury claims you did not know about when you signed. No agreement can prevent you making a protected disclosure. This is why the advice you receive beforehand matters so much, because once the document is signed there is generally no way back.

Sarah Lynch is the Managing Partner at Pomphreys. Sarah studied at Dundee University, achieving a 2:1 LLB Honours degree in Scots Law. She then moved back to Glasgow to study the Diploma in Legal Practice, being one of only a small number of students to be offered a funded position for academic excellence achieved during the LLB. Sarah then secured a traineeship concentrating on Personal Injury before deciding to broaden her scope of work to all civil litigation. We recently caught up with Sarah to discuss her role in Pomphreys.

Tel: 01698 373 365

Email: sl@pomphreyslaw.com

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